With initiatives like the AEC, TPP and OBOR, and also intra-regional FTAS, the Asian region is becoming an increasingly connected place, and this in turn is generating more work for offshore law firms. Sergio Held explores

The Asian region is growing increasingly connected in great part due to agreements like the ASEAN Economic Community (AEC) and the upcoming Trans-Pacific Partnership (TPP) and initiatives like China’s One Belt One Road (OBOR), all of which are creating both opportunities and challenges for offshore work in the region.

“We are seeing an increased demand among all ASEAN members for offshore legal services,” says Michael Gagie, managing partner of the Singapore office of Maples and Calder. “Historically, we have seen deal activity in Singapore, Indonesia and Malaysia, but other countries in the South East Asia region such as Vietnam, the Philippines, Myanmar and Cambodia are also now starting to become very active.”

And day by day more countries are benefiting from regional and intra-regional free trade agreements (FTAs), which are triggering the trade and connections among industrial sectors.

“ASEAN members are increasingly entering into FTAs as a means to expand trade and increase their participation in Asia’s advanced production networks. In fact, ASEAN is now the third largest trade bloc in the world (after the EU and NAFTA),” says David Lamb, partner and co-chairman of the Hong Kong office at Conyers Dill & Pearman.

“Vietnam, Indonesia and other member countries are benefiting from their FTAs with China, for example, by being able to offer lower wages, thus attracting foreign investment,” explains Lamb. “ASEAN has seen similar FTAs with India, Australia and New Zealand and is currently in negotiations with Japan and South Korea.”

Lamb notes that these FTAs have had the collective impact of making ASEAN a strategic hub for global sourcing and manufacturing.

His vision of ASEAN as a strategic hub is also shared by others offshoring specialists in the region, such as Frances Woo, managing partner of Appleby´s Hong Kong office. “As ASEAN has grown in importance, its attractiveness as a target market for our clients and as a source of work for us has also increased,” she says.

Appleby expects that these agreements will create more robust and confident environments for the international investment activity.

“With this comes greater sophistication in the delivery of legal services and an enhanced understanding of complex transactions is expected,” observes Woo. “Offshore operates well within this space introducing greater efficiency and effectiveness of investment.”

For his part, Nicholas Plowman, partner at the Hong Kong office of Ogier, also expects an increase in the workload, derived from the Asian agreements and initiatives.

However, usually when there is a surge in commercial activity in the region, it generally boosts the amount of offshore legal work. Offshore jurisdictions tend to provide the glue that allows transnational entities the ability to trade more freely through a reliable and safe legal and tax neutral network.

MORE COMPETITIVE ENVIRONMENT

Gagie of Maples and Calder also expects more offshore work derived from these agreements. “We expect to see more complex transactions with offshore elements and further collaboration between ASEAN companies and companies outside the ASEAN region, which will lead to more cross-border investments,” he says.

Lamb of Conyers Dill & Pearman agrees that there is more offshore-related work in the horizon.

“We expect the demand for offshore work will remain strong with these agreements in place and continue to open up opportunities for offshore within the Asian market,” says Lamb. “The FTA agreements are creating general opportunities for the leading offshore jurisdictions of Bermuda, BVI, the Cayman Islands and Mauritius.”

However, for Maples and Calder, these new agreements in Asia are causing more competition amongst traditional offshore centres and the emergence of new ones.

“We have seen the use of several new offshore jurisdictions in Asia such as the Isle of Man, Mauritius and the Channel Islands,” Gagie says. “However, the jurisdictions that remain the most popular are the ones which offer a wide spectrum of advantages. Jurisdictions like the BVI and the Cayman Islands have a sophisticated infrastructure and understand the requirements of doing business in Asia. They also have a highly skilled legal community that can service the needs of Asian clients efficiently and add value to them, so they will continue to stand out from the others,” he explains.

“The BVI and Cayman Islands are the most popular offshore financial centres in the Asian market,” Gagie observes. “Both have creditor- and investor-friendly legal systems, based upon English common law, and offer a stable political environment with adherence to international regulatory standards. Both are tax neutral jurisdictions and are not dependent upon any double tax treaties. Their flexibility and clients’ familiarity with such structures further contribute to their popularity.”

For Appleby’s Woo, it is all about the confidence in those offshore international financial centres (IFCs). “Often, transactions may be more difficult or may not occur at all if parties have no confidence in the investment vehicle,” she says. “This is where offshore IFCs such as Cayman, the BVI, Bermuda, Seychelles or Mauritius step in and play an important facilitative role.”

And China’s much-touted OBOR initiative to increase connectivity by land and sea with 65 countries in Europe, Oceania and even East Africa could provide further impetus for the growth of offshore centres. “Offshore IFCs, given that they play a fundamental role in inward and outward investment and act as a financial intermediary between and among different and varied geopolitical, legal and regulatory environments, will inevitably benefit from this if it is successful,” she adds.

In addition, Lamb from Conyers Dill & Pearman cites the connection between China’s renminbi and the offshore implications of OBOR. “Analysts predict that Chinese outbound investments linked to its One Belt, One Road agenda will be a factor in the process of RMB internationalisation and increase in the liquidity of offshore renminbi.” He explains further, “Other factors include finance from Chinese companies in overseas infrastructure investment deals as well as, for example, the ease of paying Chinese contractors in RMB on these projects and trading in RMB on the OBOR routes.”

Conyers Dill & Pearman expects that the opening of new trading routes would not only benefit various industries from OBOR but also give rise to more commercial transactions and the corresponding offshore component. “For example, the UK shipping industry has described OBOR as an ‘exciting’ plan with ‘huge ramifications for the shipping industry generally’,” says Lamb.

For Maples and Calder, OBOR will bring direct and indirect opportunities for the region. “It will create opportunities as China and Europe become more integrated, and will allow China to work with participating countries to facilitate an increase in trade and investment flows,” notes Gagie. “For instance, in relation to Irish funds, the Central Bank of Ireland has announced its permission for Irish UCITS and AIFMD funds to access Shanghai-Hong Kong Stock Connect. This opens up a substantive facility for Irish funds to invest directly in China domestic-listed equities and thus represents a significant milestone for the Irish funds industry and a welcome step in enhancing economic links between Ireland and China from a funds perspective.”

For Ogier, the OBOR inititative is likely to lead to an increase in the transactions involving offshore destinations such as Cayman Island and the BVI. “If the practical implementation of this initiative brings about an increase in economic and commercial activity in Asia generally, then we definitely expect that a number of Chinese companies will want to make use of offshore jurisdictions as part of their business activities’ legal framework,” says Plowman. “This is already the case, in fact.” He adds: “An increase in commercial activity is likely to benefit the primary offshore jurisdictions being used in Asia, namely the Cayman Islands and the British Virgin Islands.”

TPP IMPACT

While the offshore sector is particularly focused on OBOR opportunities, other trade agreements could have great impact as well.

A case in point is the TPP, which was signed at the end of 2015 but has yet to be ratified. The TPP could create large opportunities and significant challenges for offshoring in the region. With the reduction of tariffs in 12 countries, opportunities for cheaper access to market across Pacific signatories are on the rise.

“The TPP is the largest trade agreement in history. It goes far beyond promoting economic growth through liberalisation of trade and investment. In addition to reducing over 18,000 taxes – in the form of taxes – and other barriers to open trade, the TPP also aims to streamline frameworks for investment flows and governance,” says Woo from Appleby. “Participating states represent 40 percent of the world’s GDP so the removal of trade barriers via the TPP will critically drive greater economic integration between the U.S. and countries in the Asia-Pacific region.”

For Lamb from Conyers Dill & Pearman, potential beneficiaries of the TPP include the Japanese automobile industry due to a cheaper access to the U.S. export market, the Australian food production, manufacturing and pharmaceutical sectors, New Zealand’s dairy, beef and wine exports, and Vietnam´s pharma sector as well. However, Lamb warns of TPP’s adverse effects for China. “China is not a signatory and thus Chinese exporters can expect to lose market share in the U.S. and Japan - much of this to Vietnam. China is combating this with its OBOR strategy of trade routes from Asia to Europe and the new development bank,” he said.

Together, however, the TPP, ASEAN integration and OBOR are creating a number of opportunities in the region and boosting demand for offshore work by global law firms, which in turn are considering new ways to deal with the growing workload.

“We have coped with increased demand of offshore work by increasing lawyer headcount in our Singapore office since 2015 and intend to do the same in Hong Kong during 2016,” cites Gagie. “We have also increased the number of marketing trips to the different ASEAN countries during the course of the year.”

Maples and Calder, whose legal services to the ASEAN countries are provided via its Singapore and Hong Kong offices, explains that its fund administration and fiduciary services business MaplesFS has played a significant role in coping with the increasing demand of legal offshore services. “MaplesFS, our wholly-owned fund administration and fiduciary services business, has been critical in helping the law firm make the most of this increase in demand by offering a large number of ancillary services to our hedge and private equity clients, in particular to Japanese and PRC-based asset managers, who have been interested in setting up funds in Ireland and the Cayman Islands,” Gagie explains.

Conyers Dill & Pearman, for its part, is closely monitoring the business developments and opportunities created by these regional agreements. “Our work continues to reflect that of the global markets. For these new developments in Asia, we expect to see an increase in demand for our legal services and our corporate secretarial services through our Codan affiliate,” says Lamb. “We continually monitor market developments to ensure our practice areas within our offices and jurisdictions meet our client demand. Our growth strategy remains progressive, focused and selective to ensure we continue to be one of the world’s leading international offshore law firms.”

But for Appleby, it is still too soon to measure the impact of the agreements in the workload of the firm. “It is relatively early days, to be frank,” observes Woo. “We monitor our workflows carefully, and we’ll be preparing for potential uplifts in work by bolstering talent in our core areas.”

“We have been in Asia for over 25 years and are familiar with the developments and cycles. Certainly, we are matching opportunities carefully in Southeast Asia and through China’s leading role in OBOR,” she adds.

For Ogier, a combination of skills and an understanding of the regional market is their best card to face an increase in the demand of legal offshore services. “Ogier is always conscious of the need to have the right balance of legal skills, language, seniority and numbers of lawyers to actually do the work at the right level for our clients,” says Plowman. “The vast majority of our lawyers speak more than one language. All of our lawyers also have a good understanding of the regional market conditions in Asia, and this helps them more effectively communicate and handle our clients’ needs.”

Despite these advantages, a lot still depends on the economic performance of countries like China and Japan. “The question mark for us is really around the key players of China and Japan and how their economies are going to be affected in 2016,” notes Plowman.

UNDERLYING CHANGES

While the administrative departments of law firms are adapting to cope with rising demand derived from the agreements and from OBOR, legal advisors are analysing the challenges that lie underneath.

“Offshore law has always been a flexible and an easy-to-accommodate platform for foreign and outward investments, and therefore is seldom a barrier in and of itself,” says Woo. “These global agreements are heavily reliant and dependent on the local country’s cooperation and receptiveness to offshore. Much of that is affected by the local country’s geopolitical, economic, legal and regulatory environment, including factors such as exchange control, foreign ownership, etc. If these factors are inhibitive, then these may present barriers or obstacles to offshore and impact on overall development.”

For Plowman, the main challenge for clients looking at offshore destinations relies on the information exchange agreements that each jurisdiction has. “Due to a number of information exchange and information disclosure agreements and generally more complex onshore legislation over the past few years, offshore jurisdictions are required to ensure they maintain the highest standards in respect of a wide variety of onshore legislation,” he says. “The more well-regulated offshore jurisdictions can enable very sophisticated legislation quite quickly. This is one of their key advantages and that explains why they continue to be relevant and competitive,” he adds.

However, Lamb stresses that the recent trade agreements promote economic stimulus and better trade connections throughout Asia. “This is expected to create new opportunities and ways in which corporations will conduct business,” he says. “We will continue to be at the forefront of providing innovative solutions to complex transactions that the international business community will require.”

As agreements and initiatives like OBOR are being developed, it looks like Singapore and other countries in Southeast Asia will play a significant role. “There are no specific new developments in Singapore or other jurisdictions in Southeast Asia that make offshore structures more attractive than they have been in the past. But as clients in those jurisdictions become more familiar with the advantages of using offshore structures and undertake more cross-border transactions, it is likely that the use of such structures will become more prevalent,” explains Gagie.

As more jurisdictions become more familiar with the advantages of using offshore services, business in countries that could highly benefit from offshore legal vehicles include Myanmar and Laos, according to Appleby. “Singapore is very accustomed to offshore and understands its sophistication and complexity, but you also have other ASEAN member countries such as Myanmar and Laos that may not have similar levels of understanding or exposure,” says Woo.

And opportunities are just out there. To capitalise on these, international businesses and foreign investors just have to establish a subsidiary in one of the ASEAN nations, says Lamb, who also notes that Singapore is taking the lead.“Singapore has developed as a regional hub for such foreign investors, providing management, financial and other support services to subsidiaries throughout the area,” he explains.